Sandfire Hoping To Go The Full Monty

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Nobody likes a falling commodity price, but even at sub-US$2.50 levels, Sandfire is still highly profitable: in FY15 the cash operating cost was US$1.09 a pound and the company says that will decrease to US$0.95–$1.05 a pound in the current financial year.

It has not been a good few years for copper, with prices for the red metal slumping to their lowest levels since 2009. Since peaking in February 2011 at US$4.58 a pound, copper has halved, to US$2.29 a pound.

So what can a copper miner do? In the case of Sandfire Resources (SFR), it can bring out new drilling results that bear more than a passing resemblance to those that first turned the company from a rock-kicker to a miner.

Sandfire’s geologists first discovered the high-grade copper-gold deposit that would become its De Grussa mine in May 2009, in the Bryah Basin area, 150 kilometres north of the regional town of Meekatharra. The drilling results electrified the stock market: the first drill holes encountered massive sulphide mineralisation at depth, in a region better known for its gold discoveries,

The first diamond drill holes targeting the new deposit returned stunning intersections: 75 metres at 2.4% copper; 47 metres at 5.3% copper; and 35 metres at 6.9% copper. A month later drilling confirmed the presence of a second, larger zone of mineralisation immediately north of the initial De Grussa discovery. In November 2009 a third high-grade copper-gold deposit was unearthed at De Grussa. By February 2010, less than eight months after the initial discovery, Sandfire had a Phase 1 JORC (Joint Ore Reserves Committee)-compliant indicated and inferred resource of 7.03 million tonnes, at grades of 5.2% copper, 1.9 grams per tonne (g/t) gold and 15 g/t silver.

But De Grussa was not finished giving. In July 2010, a further copper-gold “lens” was found about 900 metres north-east of the original deposit.

The upshot of the bounty was that the De Grussa deposit moved from discovery drill hole to first product sales in just three years. Mining began as an open-pit operation, while a longer-term underground mine was simultaneously developed: both started production in March 2012. So far, De Grussa has produced more than 200,000 tonnes of copper and more than 100,000 ounces of gold, yielding $1.5 billion in revenue.

Like many early-stage miners, however, the share price has dipped as the excitement of drilling results gives way to the more mundane aspects of running a mine – even though Sandfire has become a profitable, dividend-paying miner. The copper price decline has not helped Sandfire, either. At $5.50, Sandfire’s share price is a long way from the 15 cents it was when De Grussa was found – but it is also a long way from the $8.99 peak of December 2012.

That said, SFR has defied the sliding copper price this year, rising by 18.3 per cent in 2015, to $5.50, for a market capitalisation of $863 million. Nobody likes a falling commodity price, but even at sub-US$2.50 levels, Sandfire is still highly profitable: in FY15 the cash operating cost was US$1.09 a pound and the company says that will decrease to US$0.95–$1.05 a pound in the current financial year.

The share price recovery is an even more impressive performance when you consider that Sandfire has lost two major shareholders. In May, South Korean steel giant Posco sold its 15.2 per cent stake in SFR, which it bought in May 2008 to support the miner’s iron ore exploration strategy – which, not surprisingly, has taken a back-seat to copper and gold. Earlier, in March, fellow copper-gold miner OZ Minerals sold its 19.1 per cent holding, at $4.21 a share. OZ Minerals bought its stake in Sandfire in July 2010. The market had expected OZ Minerals to make a full takeover bid, but it did not: when it sold out, the talk was that OZ had been disappointed with Sandfire’s lack of exploration success at De Grussa.

That was a bit harsh, given that Sandfire had doubled the size of the mineral resource since it was discovered in 2009, and pushed the mine-life at De Grussa out to mid-2021 – but it certainly all changed in June, when Talisman Mining (TLM) released drilling results from its Monty prospect, which is just 10 kilometres from De Grussa. Monty lies within Talisman’s Doolgunna Project, in which Sandfire has the right to earn up to a 70% interest by funding $15 million in exploration. A drill hole put down by the exploration farm-in joint venture between Talisman and Sandfire hit intersections of 16.5 metres at 18.9% copper and 2.1 g/t gold from 409.5 metres.

This is the first significant intersection of high-grade copper-gold mineralisation to be discovered within either Talisman’s or Sandfire’s Doolgunna projects, excluding the known lenses of mineralisation at De Grussa. To put it mildly, the discovery of a new zone of massive sulphides, similar to those seen at De Grussa, just 10 kilometres away, strongly implies that Sandfire should be able to extend further the life of De Grussa. In August, Sandfire announced that a second diamond rig had been added at Monty as a new step-out hole encountered a narrow zone of sulphides.

Sandfire is re-jigging De Grussa further, by building one of the largest off-grid solar PV power systems of its kind in the world. It is about to start building a $40 million 10.6 MW (megawatt) solar power station, which will be the largest integrated off-grid solar and battery storage facility in Australia. Sandfire is only tipping in $1 million: the project also involves taxpayer funds and German and French renewable energy expertise. Sandfire will integrate the 10.6MW solar array with its existing 20 MW diesel power station. The solar array, inverters and batteries will cover an area of around 18 to 20 hectares, equivalent to the size of 11 Melbourne Cricket Grounds.

The federal government’s Clean Energy Finance Corporation is providing $15 million to the project, while the Australian Renewable Energy Agency is tipping in $20.9 million.

German renewable energy group juwi – which will develop and operate the project – will contribute most of the balance. ASX-listed infrastructure group OTOC (OTC) build the plant in a joint venture with juwi, while French renewable energy firm Neoen will own the facility.

While the copper price is not going to turn around anytime soon – Goldman Sachs says the decline in copper prices could continue through to at least 2018, due to high supply growth as well as weakness in China’s property sector – Sandfire may have pulled a rabbit out of the hat with the Monty discovery, which has reignited interest in the region.

There is significant value in the stock in terms of consistent, low-cost copper production, and the balance sheet is strong (notwithstanding $130 million in project debt coming due this year). There certainly appears to be potential for the exploration potential that Sandfire always believed was present at De Grussa to be realised. Sandfire is likely to report a strong FY15 result, with earnings per share (EPS) up by about 20 per cent, and there is ample room for the stock to move higher, to the analysts’ consensus target price – which at $6.48, is about 18 per cent higher than the current share price.

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au